DESWELL ENJOYS A STRONG CASH POSITION AND A MANAGEMENT TEAM WITH THE EXPERIENCE AND INITIATIVE TO GUIDE IT SUCCESSFULLY THROUGH THE NEXT PHASE OF ITS DEVELOPMENT.
Deswell Industries, Inc. (‘Deswell’ or ‘the Company’) is a longstanding manufacturer of injection-molded plastic parts and components, with a global reputation for quality and excellence as an OEM manufacturer. Operating now for 24 years, 16 of them as a listed company on the Nasdaq
board, Deswell has expanded over the past decade into the manufacturing of electronics products and subassemblies, together with smaller scale manufacture of metallic molds and accessory parts. After undertaking specialized manufacturing work for several high-end audio equipment companies, it has also more recently become a distributor of highend audio equipment in China.
Since 2007, Deswell has been based at its selfowned state-of-the-art injection molding factory in Dongguan, where most of its products are manufactured. The Dongguan facility is equipped with various advanced plastic molding production technologies which include film injection, integrated injection and insert injection technology. Its specialized equipment enables the Company to produce a wide range of products, including:
• Plastic components for electronic entertainment products;
• cases for flashlights, telephones, paging machines, projectors and alarm clocks;
• toner cartridges and cases for photocopiers and printer machines;
• parts for electrical products such as airconditioners and ventilators;
• parts for audio equipment;
• cases and key tops for personal organizers and remote controls;
• double injection caps and baby products;
• parts for medical products such as equipment used in blood tests;
• laser key caps; and
• automobile components.
The Company also has a factory where it manufactures electronics products and subassemblies, located in Chang An in Dongguan. Here it assembles complex printed circuit boards using surface mount (“SMT”), automatic insertion (“AI”) and pin-through-hole (“PTH”) interconnection technologies, to produce finished products such as:
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high-end professional audio equipment (e.g. digital audio workstations, mixing consoles, instrument amplifiers, signal processors, and active speaker enclosures); |
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home entertainment equipment (e.g. AV receivers and active subwoofers); and |
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business communication products (e.g. digital phone systems). |
Also at the Chang An factory, the Company
manufactures precision sheet metal products
and their toolings; the products are used in audio
equipment, telecom products, and self service
equipment such as vending machines.
CASH RESERVES AND EXCHANGE RATE
Deswell finances most of its operations from
operating activities, and has traditionally avoided
debt. Its longstanding policy has been, wherever
possible, to redistribute profits to its shareholders.
As at March 31, 2011 Deswell had no long- or
short-term borrowings, and stable cash reserves
amounting to $35.6 million as compared to $35.1
million twelve months earlier. The stable levels of
cash reserves this year are mainly due to additional
working capital and internally generated funds.
Deswell pays around 47% of its total costs and
expenses in RMB (2010: 51%), so the ongoing
gradual appreciation of the RMB against the US
dollar continues to have an adverse impact on the
Company’s margins.
RAW MATERIALS
Plastic resin is the primary raw material purchased
by Deswell. Its cost is affected by the price of oil,
which reached record highs back in 2008 but has
since fallen. In fiscal 2011, plastic resin prices
proved relatively stable. The Company enjoyed
lower materials costs in fiscal 2011 than in the
previous year; as a percentage of the total costs of
plastics products sold by the Company, plastic resin
represented around 35% of the total in fiscal 2011,
compared with 42% in fiscal 2010.
THE IMPACT OF INFLATION AND RISING LABOR COSTS
Inflation in China has affected some materials costs
and has also been a factor behind rapidly rising
labor costs. The consumer price index (CPI), a major
gauge of China’s inflation, rose by 4.9 % in January
2011 from a year earlier, driven largely by a 10.3%
increase in food prices due to rising demand and
a drought that affected key grain-growing regions.
With the aim of reducing the country’s reliance
on exports, China’s central government has also
been encouraging wage hikes to boost domestic
consumer spending.
All Deswell’s revenues are generated from sales of
products that are manufactured at the Company’s
facilities in Dongguan, in Guangdong Province in the
PRC. This means that changing economic conditions
in the PRC directly impact on Deswell’s operating
results. In recent years, as China’s economy has
grown substantially, one of the most marked
changes in China has been in the cost of labor.
The boom in China’s economy has created strong
demand for labor across the board, especially in
areas with intensive manufacturing operations such
as the Pearl River Delta region where the Company
operates.
China has no national fixed minimum wage; local
governments set minimum wages appropriate
to their areas. Minimum wages tend to be higher
and to rise faster in areas of concentrated
manufacturing. For example, Guangdong Province,
where Deswell’s manufacturing facilities are
located, raised its minimum wage by around 20%
effective from May 1 2010; less than twelve months
later, effective March 1 2011, it raised the minimum
wage again by another 20% approximately.
At the end of fiscal 2011, across all its operations
the Company employed 2,538 employees, down
on the number at the same time last year. Clearly,
with these numbers of employees, any rise in
the minimum wage must have a direct impact on
Deswell’s operating expenses and profitability. As a
percentage of sales, labor costs peaked at 16.2% for
the year, against 12.2% in fiscal 2010. The Company
expects that the March 2011 rise in the minimum
wage will similarly affect its results adversely for the
coming year too.
These rises in labor costs pose a challenge to
Deswell. On the one hand, unless the increased
operating costs are passed on to customers through
higher product prices, the Company’s financial
results will be adversely affected, with falls in
both margins and profitability. On the other hand,
increasing its prices means the Company runs
the risk of reducing its competitiveness in global
markets such as the US and the European Union,
with a subsequent loss of business.
One of the biggest suppliers of Chinese goods to
Western markets has recently warned that the
era of cheap products emanating from the China
market is about to come to a end, as a direct result
of rising labor and raw materials costs in China.
Instead, Western markets will turn to new lowcost
manufacturing sites in other countries. This
scenario, while perhaps accurate for certain types
of goods, does not hold good for a company such as
Deswell. The Company is now a long-established
one with a proven international reputation,
possessing levels of technological expertise and
superior quality that cannot easily be reproduced.
It has many longstanding customers who rely on
Deswell’s innovative technology and reliability for
their own wellbeing, and who are willing to pay
a premium (in terms of raw materials and labor)
to maintain this relationship. In addition, Deswell
enjoys a strong cash position and a management
team with the experience and initiative to guide
it successfully through the next phase of its
development.
The period ahead can instead be viewed as a new
era dawning for Deswell, one in which necessarily
higher product prices will be linked with superior
performance to attract a new and even more solid
international customer base for future success. In
this way, Deswell looks set to remain an important
force in the global plastics and electronics sectors.
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